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Starting to invest for retirement
Bankrate.com
10/21/2005
Dear Dr. Don,
I'm 42, not married and have some money in my checking account I want to invest. I only invested in CDs before now. I used to have a fear of high-risk investing.
As I read in Smart Money magazine there is a lot of emphasis on how most investors should be investing, largely, if not entirely, in stocks. T. Rowe Price agrees. Its Retirement 2030 fund has 90 percent of its assets in stocks, 7 percent in bonds. I would like to diversify my portfolio with U.S. and foreign stocks and bonds, IRAs/401(k) plans.
I need to know what's the right investment mix to help generate income and how can I try to make my assets last through my retirement. I am trying to avoid commissions and fees. I am also aware that I can get a loan to pay for college, a new home or even a wedding, but there's no such thing as a loan to cover my retirement. Could you help me please?
-- Monika Moraine
Dear Monika,
Considering your investment horizon is an important part of choosing your investments. When investing for a retirement that is 25 years away you probably are willing to accept some volatility or variability in returns year over year because you have some rebuilding years if your investments have a bad year or two.
The mutual fund you mention will change its asset allocation away from 90 percent stocks as it closes in on the year 2030 because the investment horizon has shortened and reduced the number of rebuilding years. How far away is up to the fund manager. There's room for a difference of opinion here. Fidelity has a retirement fund for 2030 and its portfolio manager expects to own a lower percentage of stocks in 2030 than the T. Rowe Price fund manager does in that 2030 fund.
A little knowledge is a dangerous thing. Reading a couple of articles and the promotional material from a mutual fund company isn't providing you with enough information to make an intelligent decision, and it isn't likely to be changing your attitude towards risk.
You need to determine how you feel about investing in stocks and bonds either individually or through mutual funds. Part of this is establishing your tolerance toward risk. If you're uncomfortable investing in financial securities like stocks and bonds with fluctuating returns, you may be better off sticking with certificates of deposit, or CDs, or other low-risk investments and just saving more to compensate for the lower expected returns. Treasury Inflation Protected Securities, or TIPS, and Series I Savings Bonds both offer a return over inflation as measured by the Consumer Price Index, or CPI, while still offering a full faith-and-credit guarantee on the investment.
If your employer offers a 401(k) plan you will be limited to the investments allowed by that plan. You may struggle to find a fund that both matches your investment strategy and has a low annual expense ratio and no sales loads. The advantage of the 401(k) is that the money will grow tax deferred and your company may make a matching contribution to your account. New on the block this year are Roth 401(k) plans where you contribute after-tax dollars, but retirement distributions will be free of federal income taxes.
IRA or Roth IRA accounts are possible alternatives, but there are limitations as to who can contribute to these accounts. Keep in mind that these are types of accounts, not types of investments. In general you have a choice of investing in tax-advantaged retirement accounts or taxable accounts where you pay taxes on the realized investment returns as you go. After you decide on the type of account, you still have to decide how to invest the money.
The field is called personal finance because the advice needs to be right for the person. If you're 42 years old and never owned a stock in your life, putting all of your money in a mutual fund that is 90 percent invested in stocks, regardless of how good a job they do, isn't likely to be right for you.
While the retirement funds are a good way to allow a professional money manager to decide asset allocation in the fund as you move closer to retirement, it's not the only way to accomplish this asset allocation goal. Don't jump in with both feet on this one. Spend the next few years putting your toes in the water by investing in different financial securities through no-load mutual funds and gain a sense of how you feel about investing with variable returns. The retirement funds will still be there.
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